Pago de la devolución

If the price-ceiling/cost-floor model of drug shortages is accepted, the next question becomes, what, if anything, can be done to resolve the problem? As discussed, all of the commonly-cited contributors to drug shortages can be understood as dampening profits in one way or another. Some factors impose price ceilings which prevent the manufacturer from increasing its profits by raising the cost of its products. Other contributors create cost floors which stymie any attempt by a manufacturer to further cut costs to keep profits at an attractive level.

45 What the model shows is that an effective solution has to do one of three things: (1) It can increase the price ceiling, thereby allowing the manufacturer to charge more for its products; (2) it can reduce the cost floor, which makes it cheaper for the manufacture to produce its products;

(3) it can allocate a greater proportion of the end profits to the manufacturer, thereby reducing the opportunity cost of continuing drug production. Whatever route is taken, it is imperative that the solutions be long-term fixes. The highly capital-intensive nature of drug production means that manufacturers need confidence that they can sustain any price hikes or cost savings over the long-term. Short-term solutions deter all but the most risk-preferring firms. It is also important that any strategy help private parties help themselves. Solutions that help private parties tailor their own fixes are more likely to stick.

1. Tax subsidies via credits and deductions

Tax subsidies are one potential fix. Whether in the form of credits or deductions, tax subsidies reduce the cost floor, thus lowering business expenses. Tax subsidies are common in the pharmaceutical industry. Of particular relevance to the drug shortages problem are the tax subsidies established by the Orphan Drug Act of 1983. The purpose of the Orphan Drug Act was to promote the development of drugs used to treat rare diseases or conditions¹²². The Act

established a fifty percent tax credit on clinical trial expenses for orphan drugs¹²³. The effects of this tax subsidy are difficult to separate from other potential causes, but there has been a marked

122An orphan drug is a drug for a rare disease or condition which affects such few people that there are insufficient financial incentives for firms to develop such drugs. A rare disease or condition means “any disease or condition which... affects less than 200,000 persons in the United States”. 21 U.S.C. § 360aa-ee (2011).

123 See Sheila R. Shulman et al., Implementation of the Orphan Drug Act: 1983-1991, 47 Food & Drug L.J. 363, 365 (among the production incentives created by the Orphan Drug Act were “development grants, protocol 'assistance from the FDA for nonclinical and clinical investigations, tax credits for 50%

of qualified clinical testing expenses, and a seven-year period of marketing exclusivity.”).

46 increase in the number of orphan drugs released since its passage¹²⁴. The success of the tax credit established by the Orphan Drug Act makes this approach particularly attractive for sterile

injectables. The expected returns from drugs that treat rare diseases are too low to cover the high fixed costs of research and development¹²⁵. Market incentives such as tax subsidies make up the profit shortfall and boost the attractiveness of orphan drug manufacture. More specifically, tax credits are a type of “push program” which work to reduce the costs of development for orphan drugs¹²⁶.

Similar “push programs” could be used to incentivize sterile injectables production. If the purpose is to encourage improvements to the production process, tax subsidies could be offered to firms that introduce streamlined manufacturing procedures or upgrade existing facilities (e.g.

by installing new technologies that reduce quality control expenses). If the purpose is to

encourage production of specific types of drugs, tax subsidies could be limited to new entrants or new manufacturing lines for drugs that are likely to be in short supply (e.g. tying credits or deductions to manufacturing sterile injectables). The precise details are a matter for tax authorities to work out, though the advantages of a tax subsidy approach are significant if the administrative costs are kept down.

In terms of supply-demand curves, tax subsidies shift the supply curve to the right. This rightward shift means that the manufacturer will be willing to supply a larger quantity of goods at a particular price. Because the demand curve will remain unchanged, the manufacturer will be willing to accept a lower price for the goods than before. A portion of the surplus from the

124See Henry Grabowski, Increasing R&D Incentives for Neglected Diseases: Lessons from the Orphan Drug Act 12 (2003) (noting that although causation is difficult to isolate, “…the more than tenfold increase in the rate of orphan drug approvals since 1983 is indicative that the Act has indeed been a powerful stimulus to increased R&D investment on rare illnesses”).

125 See id. at 2.

126 See id. at 9. (“In the push category, one has R&D cost sharing or subsidy programs. These can be done through tax credits, research grants, and related economic incentives.”).

47 subsidy will be kept by the manufacturer (in the form of increased profits), and a portion will be transferred to consumer wallets. One potential problem with tax subsidies is that they tend to distort economic behavior. When one activity is subsidized, you are likely to see more of it, for better or for worse. The distortion is not necessarily bad if it can be tailored to achieve desirable outcomes such as the increased production of drugs in short supply.

2. Less stringent CGMPs and cross-border harmonization

Another valuable fix would be to cut back on FDA regulations in the drug production industry. FDA regulatory prowess contributes to overall consumer safety by ensuring drug integrity. Rigorous FDA regulation of drug production also comes with a cost: Efficiency losses in terms of time and money. The challenge in any regulatory debate is at what point the costs exceed the benefits: Where does one draw the line between excessive red tape and necessary government involvement? Line-drawing is always a difficult exercise, but as discussed

previously, there are indications that the current FDA regulations are stricter than they should be.

The goal for the FDA should be to make its regulations as efficient as possible without compromising public safety. It can do so through several changes. First, the Current Good Manufacturing Processes should be relaxed. The FDA should remove any unnecessary barriers to safe and reliable production. Some suggested changes are to streamlining the process for remediating facilities recently taken off line as a result of regulatory action¹²⁷; expediting review of supplements (i.e. requests to expand or modernize manufacturing facilities) to generic drug manufacturing¹²⁸; and fast-tracking Abbreviated New Drug Applications for drugs vulnerable to

127 See Drug Shortages: Why They Happen and What They Mean: Hearing Before the S. Comm. on Fin., 112th Cong. (Dec. 7, 2011) (statement of Dr. Scott Gottlieb, Resident Fellow, American Enterprise Institute for Public Policy Research).

128 For the rest of the almost 3,000 supplements that are on backlog, these applications can sit for months and sometimes years owing to a lack of resources to enable their timely review. Though the FDA has an expedited review procedure, it only kicks in when the drugs approach shortage status.

48 shortages¹²⁹. In terms of supply-demand curves, reduced regulation translates to lower costs for manufacturers. When production costs decline, the supply curve shifts right, meaning that a greater quantity of goods will be supplied at a particular price.

Another regulatory improvement would be to harmonize CGMP requirements across borders. Harmonization means a reduction in cross-border regulatory barriers: A company that has multiple production facilities worldwide can comply with a single set of regulations. Cross-border harmonization would increase the size of markets for manufacturers and make large-scale investments in production more attractive¹³⁰. On the supply-demand curve, the supply curve would again shift right to account for the reduced regulatory costs. Another possible effect is that the demand curve will shift right as the volume demanded increases. When the market grows, the manufacturer will have a greater audience for its products and hence, a greater incentive to increase the quantity supplied.

The most salient criticism of rolling back regulations is that it could compromise safety.

as the argument goes, each additional layer of FDA regulations leads to significant gains in terms of health and welfare. One problem with this criticism is that it assumes that regulatory

efficiency is a zero-sum game. However, there is no reason to believe that consumer safety is necessarily sacrificed if regulatory burdens are softened. The FDA itself has relaxed regulations to deal with drug shortages, with little or no effect on consumer safety¹³¹.

129See Examining the Increase in Drug Shortages: Hearing Before the H. Comm. on Energy &

Commerce, 112th Cong. (Sept. 23, 2011) (statement of Dr. W. Charles Penley, American Society of Clinical Oncology).

130See Drug Shortages: Why They Happen and What They Mean: Hearing Before the S. Comm. on Fin., 112th Cong. (Dec. 7, 2011) (statement of Dr. Scott Gottlieb, Resident Fellow, American Enterprise Institute for Public Policy Research).

131 One of the most common responses to drug shortages by the FDA has been to exercise “regulatory flexibility and discretion” and “expedite regulatory reviews”. Though what is meant by “regulatory discretion” is never clearly defined, a report by the FDA suggests that this finding meant that “the benefit

49 Another problem with this criticism is that it privileges salient gains over invisible losses.

If the FDA had more lenient manufacturing standards, for example, it is quite possible that some people would be harmed by defective products. Any system of regulation is imperfect, but the more lenient the standards, the more probable it is that a defective drug will slip through unnoticed. To dodge public criticism, the FDA may have an incentive to avoid these highly visible costs¹³². The resulting invisible losses never enter the accounting. For every patient whose life is saved by rigorous production standards, there may be a patient who never had a chance because the regulations were too onerous.

3. Flexible Medicare Part B reimbursement schedules

Perhaps the best candidate for reform is the prime suspect in the drug shortages debate:

Medicare Part B. The reimbursement policies of Medicare Part B effectively act as price controls by imposing a 6% ceiling on manufacturer profits and a race-to-the-bottom pricing formula. A modest proposal for reform is to move away from the ASP pricing methodology and adopt flexible reimbursement schedules that are better tailored to market conditions. In terms of supply-demand curves, when the price goes up, the quantity supplied increases correspondingly.

Demand decreases to the extent it is inelastic, which is usually not the case for life-saving drugs.

One possibility is to base reimbursement on the Wholesale Acquisition Cost (WAC), the price paid by wholesalers on the open market¹³³. The WAC is a market-based price that allows

of the drug was judged to outweigh the risk of the quality or manufacturing issue”. See A Review of FDA's Approach to Medical Product Shortages, supra note 74, at 20-21.

132 Daniel P. Carpenter, The Political Economy of FDA Drug Review: Processing, Politics, And Lessons for Policy, 23 Health Affairs 52,53 (“deciding not just if but when to terminate drug review and approve an application... is driven by the FDA’s desire to safeguard its reputation for protecting the public’s health”).

133 See Drug Shortages: Why They Happen and What They Mean: Hearing Before the S. Comm. on Fin., 112th Cong. (Dec. 7, 2011) (statement of Dr. Scott Gottlieb, Resident Fellow, American Enterprise Institute for Public Policy Research).

50 firms to incorporate rising production costs and demand¹³⁴. Another option is to increase the reimbursement for drugs deemed in short supply (or drugs susceptible to shortages), with the precise reimbursement amount determined by an individualized review by CMS or some other body¹³⁵. Of course, any reform of Medicare reimbursement policies should account for the risks of price-gouging that motivated the switch to ASP in the first place¹³⁶. There are ways to

mitigate price-gouging behavior. For example, reimbursement rates can be tied to prices charged by manufacturers for similar products in other countries or by other payors¹³⁷. Comparison-pricing would force manufacturers to raise prices for several markets at once or else discount Medicare charges. Medicare Part B could also replace its group billing codes with individualized billing codes¹³⁸. This would allow CWS to base its reimbursement on prices for individual drugs, rather than the prices for all drugs within a certain category.

A more extreme proposal is to transfer drugs from Medicare Part B into Medicare Part D or to adopt the Medicare Part D competitive bidding process for Medicare Part B drugs¹³⁹. Unlike Medicare Part B, Medicare Part D does not impose price controls on prescription drugs.

Drugs covered by Medicare Part D are priced via a competitive bidding process¹⁴⁰. By contrast,

134 Id.

135 This would entail “resetting” the ASP of the affected drugs to either the WAC or some other price that better reflects market conditions. Id.

136 See Medicare Payments for Covered Outpatient Drugs Exceed Providers' Cost, United States General Accounting Office, Sept. 2001 (“the average wholesale prices – the “list prices” or “sticker prices” set by drug manufacturers and used by Medicare to calculate payment rates – were not representative of the actual costs of these drugs to providers”).

137 Joseph P. Newhouse, How Much Should Medicare Pay For Drugs?, 23 Health Affairs 89, 95-96 (2004).

138See Drug Shortages: Why They Happen and What They Mean: Hearing Before the S. Comm. on Fin., 112th Cong. (Dec. 7, 2011) (statement of Dr. Scott Gottlieb, Resident Fellow, American Enterprise Institute for Public Policy Research).

139 See Strengthening Health and Retirement Security: Hearing Before the H. Budget Comm., 112th Cong.

(Feb. 28, 2012) (statement of Rep. Paul Ryan, Chairman, H. Budget Comm.).

140 More specifically, what happens with Medicare Part D is that insurers submit bids to Medicare for the cost of standard coverage in their plans. From these bids, a national average bid is computed, and

51 drugs covered by Medicare Part B are priced through an administrative mechanism that does not harness market forces to set an appropriate price.

4. Guaranteed purchase programs and stockpiling

Besides tinkering with reimbursement rates, some commentators have pushed for guaranteed-purchase programs as well as stockpiling for affected drugs¹⁴¹. Under a guaranteed-purchase program, the government would provide a fixed demand for affected drugs by agreeing to purchase a minimum quantity in a certain time period. The guaranteed purchase would remove some of the uncertainty inherent to generics injectables manufacture and encourage production of these products. Under a stockpiling system, the government would purchase and store an emergency supply of drugs that are experiencing (or prone to experience) shortages. Stockpiling would increase demand for drugs, as well as supplement any emergency need for life-saving medication. For reasons discussed at length in the next section, neither guaranteed-purchase programs nor stockpiling are likely to be successful fixes to drug shortages.

5. Limiting the scope of the 340B drug discount program

Closely related to Medicare Part B is the 340B drug discount program which also creates a price ceiling for covered prescriptions¹⁴². Nearly a third of all U.S. hospitals qualify as

“covered entities” that are entitled to force drug discounts from manufacturers¹⁴³. The purpose of

participating insurance plans are subsidized this average amount. By involving market forces in setting the subsidy rate, competitive bidding more accurately reflects the actual costs of the plans.

141 See Gardiner Harris, U.S. Scrambling to Ease Shortage of Vital Medicine, N.Y. Times, Aug. 19, 2011;

ASHP, Drug Shortages Summit Summary Report at 7 (Nov. 5 2010).

142 The 340B program contributes to the price ceiling in two ways. First, it directly limits the price for all drugs sold to covered entities under the program. Second, the program also indirectly contributes to Medicare Part B price caps because 340B prices are incorporated into the reported ASP for each covered drug. See Drug Shortages: Why They Happen and What They Mean: Hearing Before the S. Comm. on Fin., 112th Cong. (Dec. 7, 2011) (statement of Dr. Rena Conti, Assistant Professor, University of Chicago).

143 See Manufacturer Discounts in the Manufacturer Discounts in the 340B Program Offer Benefits, but Federal Oversight Needs Improvement, supra note 41, at 20.

52 the 340B program is to enable covered entities to stretch scarce federal funding. There is no reason why more rigorous requirements to qualify as a covered entity would not further this goal. The great scope of the program suggests it has become less the exception than the rule for many U.S. hospitals. Alternatively, the Health Resources and Services Administration should perform more rigorous oversight of covered entities to ensure they are not reselling discounted drugs and pocketing the price difference¹⁴⁴. The HRSA should also be held to task for

confirming the eligibility of covered entities¹⁴⁵. If 340B participation is policed more thoroughly, manufacturer profit margins will not be as severely squeezed by deep discounting. Lastly, a more total solution would be to completely eliminate the program to remove the harmful influence of deep discounts on market pricing¹⁴⁶. This option may not be politically viable due to the

entrenched interests that are unlikely to give up the discounts easily. Regardless, any cuts to the scale of the 340B program will have beneficial effects on the drug shortages problem. The 340B program imposes price ceilings for drug sales to covered entities; limiting the scope of the program removes some of these price ceilings, which will increase the quantity supplied.